Chinese tyremakers headed for consolidation?

While falling demand for truck and bus radials is putting pressure on sales of premium and import brands alike, the number of factories and the amounts of tyres each are producing continue to proliferate. Tyres & Accessories recently met with several companies in the same boat at the recent Reifen Show in Essen Germany in June. While the consensus agreed in general terms about the decline in truck tyre demand across Europe as a whole, clearly not everyone’s experience is the same and there could be key strategic reasons why production output seems to carry on regardless.

According to one of Wanda Boto Tyre’s global managers, the truck tyre demand slide that has recently been experienced in the market has been caused by the “overall environmental decline of European economies”. Speaking for the Chinese manufacturer that represented itself at the show simply as “Boto”, Zhao’s firm is one of many Chinese tyre businesses that finds itself pressed on a number of fronts. Firstly the cost of production, while lower than Western Europe continues to rise in tandem with the explosion of China’s burgeoning middle class.

Falling European TBR demand puts import brands under pressure

Meanwhile raw material and shipping costs remain at historically high levels and – as far as shipping costs in particularly are concerned – remain notoriously unpredictable. At the same time several representatives of various Chinese tyre manufacturers have expounded the view that tyre labelling is a kind of back-door protectionism that seeks to regulate which products are getting into the European tyre markets without mentioning that this is the intent.

Nevertheless many Chinese manufacturers continue to increase production output seemingly irrespective of the economic conditions they find themselves in. For example Boto’s production capacity currently totals 2 million truck and bus radials, 500,000 passenger car tyre and 100,000 off-the-road/earthmover tyres annually. Despite the lack of demand currently found in key export markets, the company is still planning to increase its truck tyre output by 50 per cent to 3 million units including 315/55 R22.5 sized products. Meanwhile passenger car production is predicted to reach 10 times its current level (5 million units) by the end of 2012, with 15 million units on the roadmap.

Carry on regardless?

So why would tyre manufacturers that are already producing literally tonnes of tyres that they are not selling want to increase output even more? There are likely to be many reasons for this, but there is at least one key strategic explanation. Consolidation. With the largest tyre manufacturers in China increasingly seeking to be international and even global players – the presence of six of these firms in the global top 20 somewhat emphasises this point – the importance of differentiating themselves and leading the market in terms of both volume and quality is always increasing. At the same time, behind this premier league of Chinese suppliers, there are a number of modern quality firms (their new factories are made with western machinery and the help of European consultants) with no shortage of output that are nevertheless some way behind the GITI, Hangzhou Zhongce, Maxxis, Triangle and Linglongs of this world. With Chinese government policy seemingly favouring the large scale operations of the leading players there is grounds for speculation that there may be some buy-outs on the horizon.

Any growth by merger or acquisition is likely to come in one of two directions. Either one of the “premier league” will purchase their favourite second tier factory or two or more of the strongest followers may club together to strengthen both their domestic and international positions. Whichever option transpires – or not – in the long run, little wonder that certain tyre manufacturers were setting out that shop stall in Essen. Whether literally doing so with big stands and attention grabbing exhibits or metaphorically with continuously increasing factory output and almost unbelievably good labelling results – it wasn’t just visitors to the show that some Chinese tyre manufacturers are trying to attract.